Can Governments Ban Cryptocurrency?

Many countries, including China, Korea, and Russia have hinted that they might crack down on cryptocurrencies and ICOs, or at least heavily regulate them. This triggered a period of very high volatility during Summer 2017. The volatility in the cryptocurrency sphere is now slowly retracting back to ‘normal’ levels. However, uncertainty still persists as South Korea prohibits ICOs, Deputy Finance Minister of Russia tells reporters that Bitcoin might be banned and the SEC files charges against two more ICOs.

Is it possible to ban cryptocurrencies?

Yes and no. From a technical standpoint, it is very hard for a government to ban a cryptocurrency. All that Bitcoin needs to survive are two individuals that want to make a transaction and a miner. Chasing those down and prosecuting them all around the globe would be very difficult. The second option in which Bitcoin could be physically banned is if a country shuts down the local internet.

In 2016 alone, there have been over 50 incidents of internet censorship. In 2006 the US Government approved SOP 303. This document presents a protocol for the shutting down and restoration of wireless networks during a national crisis. Therefore, it could be possible for the Government to block American citizens from accessing the internet.

However, there are many more ways how cryptocurrencies could hypothetically be stopped that don’t involve shutting down the national communication infrastructure. In order for a cryptocurrency to be useful, people need to be able to trade it for real-world money or assets. There are several ways in which a government can exploit this in a crackdown.

Anti-money laundering laws

Governments could attack the entities that bridge Bitcoin with the physical world with anti-money laundering laws. That is cryptocurrency exchanges and merchants that accept payments in cryptocurrencies. It is very hard to ban Bitcoin as a form of internet cash, but governments could potentially shut down any elements that link it to the ‘real world’.

Destabilizing the price

Rich governments could try to destabilize the price of cryptocurrencies in a direct way. Given the relatively low total market cap of all cryptocurrencies, only $147 bln at the time of writing, this is definitely doable. A wealthy government could purchase a significant amount of Bitcoin or Ether over the course of some months. This reserve could then be used to regularly crash the price, effectively destroying the economy that is built upon cryptocurrencies.

Attacking the brand image

Governments could attack the brand image of cryptocurrencies, with statements like ‘Bitcoin os only used for money laundering and online drug markets’. Over the course of several months, this could potentially twist the public opinion up to the point where the average person associates cryptocurrencies with ‘money for criminals’. A slightly similar phenomenon already happened back in 2013 when Silk Road first made it to the headlines.

What can citizens do in the event of a crackdown?

As analyzed in the previous paragraphs, theoretically, it might be possible for governments to effectively ban a cryptocurrency like Bitcoin. However, there are numerous ways in which citizens could potentially skip the law in a crackdown. A good example for this are Chinese traders, which made mainstream news for totally defying ICO and exchange bans.

Going offshore

Cryptocurrency investors could go offshore and buy or sell their coins there. Many Chinese traders affected by the ban chose to simply move their operations to countries like India or Russia.

Purchasing cryptocurrencies with cash

If a country shuts down all local cryptocurrency exchanges, its citizens could still continue doing OTC trades with cash. Two platforms that enable such interactions between investors are LocalBitcoins and Dether.

After the Chinese ban on exchanges, LocalBitcoins posted its highest-ever weekly volumes for the seven days to September 23rd. This shows that OTC trades are a viable option indeed. Another interesting approach is Dether. Dether aims to break the barriers to Ethereum mass adoption by building a peer-to-peer Ether network where users can buy and sell this currency with cash.

What could happen if cryptocurrencies were banned?

If several large governments state that they will ban cryptocurrencies, a short-term sell-off should definitely be expected. This already happened in early September when China hinted to a potential cryptocurrency crackdown. Consequently, the total cryptocurrency market cap dropped by roughly 20 percent in the next days.

While a short-term correction is quite predictable in the event of a ban, the long-term implications are impossible to estimate. The consequences could be catastrophic, causing cryptocurrencies to become a thing of the past, or extremely positive by boosting the adoption rate due to massive global press coverage.

The past has shown that large institutions are rarely successful in banning revolutionary technologies; Luddites in the UK tried to avoid the industrial revolution to conserve their jobs, the Congress attempted to ban digital audio recorders to ‘save’ the music industry and David Cameron hinted that encryption technology may be prohibited. Cryptocurrencies are considered by many to be the next logical step for our financial system. Therefore, it’s unlikely that they will be an exception to this rule.

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